Global Perspectives

The disciplined budget should help the central bank ease its key rate while building political capital with the crucial rural sector, helping economic growth and structural reform prospects.

Chawri Bazar—Delhi, India

India has unveiled its financial year 2017 budget, garnering a nice mix of criticism across the country’s political and economic spectrums. Though it’s not obvious, Prime Minister Narendra Modi’s administration must be doing something right. Many of Modi’s supporters see only policy tinkering, but without his party’s control of India’s upper parliamentary chamber, incremental, not revolutionary reforms, are a surer way to go for Asia’s third-largest economy.

Modi was elected nearly two years ago in an unprecedented victory for his Bharatiya Janata Party (BJP) with a strong market-opening, reformist mandate, and has disappointed reformist supporters ever since. They had expected the highly effective chief minister to replicate his economic success over 13 years in Gujarat State on the national level as prime minister. But state and national politics, especially in India, are different ball games. Modi has faced entrenched Congress party interests in a country with statist traditions marked by patronage and protectionism. Manmohan Singh, Modi’s predecessor as PM who in previous decades had also served as a reformist Congress party finance minister and governor of the Reserve Bank of India (RBI), ultimately left the country’s highest office on a low note, following allegations of corruption against Congress party members, slowing economic growth and stalled reforms.

So those hoping for big initiatives in the latest budget may increasingly agree with at least parts of Congress Spokesman Manish Tewari’s tweet that the FY17 budget was “high on rhetoric, flawed on comparison, low on imagination, bereft of ideas, services oligarchs, constricts freedom of RBI.” He added in a television interview that it will shrink the Indian economy and asserted that markets gave the budget a “thumbs down.” Tewari’s own rhetoric aside, equity market reaction did indeed signal disappointment, with the benchmark BSE Sensex index sliding 0.7%. But the bond market gave it a thumbs up, with India’s 10-year bond yield falling 16 basis points to 7.62%, while the rupee ended the post-budget session at 68.43/USD, marking its strongest advance since Feb. 4.

The FY17 budget, which kicks off the fiscal year starting April 1, is fiscally tight, targeting a budget deficit of 3.5% after effectively meeting the FY16 target of 3.9%. The central bank needed a little more belt tightening to resume easing its benchmark interest rate, which it last cut a half point from 7.25% to 6.75% in September. The RBI reached its FY16 headline consumer inflation target of sub-6%, but needs more help on the fiscal front to manage inflation expectations and achieve its March 2017 inflation goal of around 5%.

FY17 expenditures are tabbed at IRN5.5 trillion, and are focused largely on India’s farmers and rural population, which represents about 67% of India’s 1.3 billion people, as well as on infrastructure. Although agriculture represents just 15% of India’s GDP, the sector employs half of its workforce. So after two poor monsoons, it makes political sense to undercut Congress’ populism with targeted social and badly needed infrastructure spending, which is slated to rise 22.5%. The BJP lost state elections last year in Bihar and Delhi, and will need political capital with elections coming in Assam, Puducherry, Kerala, West Bengal and Tamil Nadu. More such losses would only undercut its legislative wherewithal.

Some of the FY17 budget assumptions may be questionable. Nominal gross domestic target growth is pegged at 11%, which could be challenging with lackluster global growth dampening India’s exports and, at home, India’s corporate financial positions and public bank balance sheets laden with downside risks.

Interestingly, while the equity market on the whole fell in the wake of the budget presentation, shares of public sector banks, collectively known as PSUs, rose on expectations that recapitalization plans would ultimately turn out to be greater than the originally flagged budget allocation, which remained a modest INR250 billion. In fact, a day after the budget, the RBI did indeed announce a boost to banks’ capital levels by allowing revaluation reserves from changes in banks’ real estate values, foreign currency translation reserves (FCTR) and deferred tax assets to be considered as common equity tier 1 capital (CET-1). Nomura estimates that past adjustments could add INR210 billion to the CET-1 capital of PSUs, and future adjustments could be equally large. Some are also hoping that the government will cut its stakes in PSUs below 50%, starting with IDBI Bank.

Modi and Finance Minister Arun Jaitley were also criticized for not slashing corporate taxes across the board. The budget instead cuts them selectively because exemptions weren’t eliminated. This facilitates reaching the 3.5% fiscal deficit target, and certainly won’t hamper foreign direct investment (FDI), which climbed to more $35 billion in 2015, almost double its level in 2013. That’s important, as FDI for the first time now more than covers India’s 1.5% current account deficit. The FY17 budget also proposes to increase FDI caps in state-run companies, except banks, to 49% from 24%. It also promotes foreign portfolio investment in the domestic capital market, which needs deepening.

Other key budget initiatives include introducing a bankruptcy code for financial firms, which should be easy to pass as it can be done at the national level, only needing lower house approval. Land reform will be more challenging, and will have to be done at the state level, but the budget’s rural focus should facilitate the process. The government also anticipates stake sales and strategic divestments of INR760 billion. It will have to do better than it did over the past year with disinvestment revenues, though, as it collected just more than a quarter of what it had originally budgeted, after getting “cold feet” on the sales, as one economist put it.

More broadly, apart from labor market reforms, perhaps the most important initiative is a pending goods and services tax (GST) that is crucial to opening interstate commerce, making taxation more efficient by replacing central government and state indirect taxes and bringing more businesses into the formal economy, while creating efficiency gains for them by reducing logistics expenses. Passage of the GST, which the Congress party has opposed, “would further spur economic activity and exert downward pressure on inflation,” according to the International Monetary Fund. Some economists reckon it could add one to two percentage points to GDP, depending on the degree to which it’s watered down upon passage, possibly later this year.

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Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Danan Kirby is a portfolio specialist for Thornburg Investment Management. He works with Thornburg’s investment team and serves as a liaison for the team and key investment decision makers, communicating process and results of the firm’s investment strategies. Danan joined Thornburg in 2016.

Prior to Thornburg, Danan served as portfolio manager for the Strategic Growth Bancorp family of banks, managing various strategies for institutions and individual investors. Before that, he was a financial institution specialist with the FDIC. He is also a veteran of the U.S. Army. Danan graduated summa cum laude from the University of New Mexico’s Anderson School of Management with a BBA, concentrating in finance.

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Josh Rubin is a client portfolio manager for Thornburg Investment Management. He works with Thornburg’s investment team, serving as a liaison for the team and key investment decision makers and communicating process and results of the firm’s investment strategies. He joined Thornburg in 2017.

Before joining Thornburg, Josh worked on the global equity investment team at Driehaus Capital Management in Chicago where he held several roles, including portfolio manager of the global equity strategy, portfolio manager of the U.S. large-cap and U.S. mid-cap equity strategies, and senior analyst covering emerging markets. Josh also spent over seven years at Marsico Capital Management in Denver, where he was a co-portfolio manager of the emerging markets fund and a senior analyst covering global companies across sectors. He began his career in finance as an investment banker in the fixed income division at George K. Baum & Company in Denver.

Josh holds a BSFS in international politics from the Walsh School of Foreign Service at Georgetown University.

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Danan Kirby is a portfolio specialist for Thornburg Investment Management. He works with Thornburg’s investment team and serves as a liaison for the team and key investment decision makers, communicating process and results of the firm’s investment strategies. Danan joined Thornburg in 2016.

Prior to Thornburg, Danan served as portfolio manager for the Strategic Growth Bancorp family of banks, managing various strategies for institutions and individual investors. Before that, he was a financial institution specialist with the FDIC. He is also a veteran of the U.S. Army. Danan graduated summa cum laude from the University of New Mexico’s Anderson School of Management with a BBA, concentrating in finance.

Stephen Jimenez is a client portfolio manager for Thornburg Investment Management. He focuses on Thornburg’s liquid alternative strategy and serves as a liaison between the investment team and clients.

Prior to joining Thornburg, Stephen was a salesperson at III Capital Management, a $4 billion hedge fund management company focused on rates and credit strategies. He also held various positions in the alternative asset management industry, including Coast Investment Management, a $7 billion fund of hedge funds. His roles included global product specialist and hedge fund analyst, focused on fixed income relative value strategies. Earlier in his career he was a U.S. Treasuries market maker and arbitrageur at major Wall Street firms, including Bank of America and UBS.

Stephen attended the University of Washington, where he graduated with a BA in economics. He is currently registered with FINRA with a Series 7 and 66.

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Charlie Wilson is portfolio manager for Thornburg Investment Management. He joined the firm in 2012 as ­associate portfolio ­manager and was promoted to portfolio manager in 2014.

Charlie earned a BS in geology from the University of Arizona in Tucson and a PhD in geophysics from the University of Colorado in Boulder. Prior to joining Thornburg, Charlie served as co-portfolio manager for Marsico Capital Management in Denver, Colorado. He was responsible for portfolio investments across multiple strategies and geographies, with specialization in materials, energy, technology, and payments sectors.

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